China's Innovative Pharma Industry: What the Latest Set of 5-year Plans means for this sector

It is China month here at Bioassociate, and in our previous post on China we covered some of the new initiatives filed in the latest set of 5-year plans aimed at making China a competitor in the originator pharma space.

One such initiative has been the direction of foreign investment towards niches which the government has deemed "innovative". Needless to mention, pharma and biotech are high priority on the list of said niches. 

Another issue which the government has prioritized (for very obvious reasons) is the intellectual property protection situation in the country. Historically, China has been one of the most notorious violators in the IP space, but perhaps all of that is about to change over the next decade. 

Direction of Foreign Investment

The Chinese government has specified rules on the direction of foreign investment in order to nurture certain priority sectors and to restrict investment in others. China’s foreign investment policy is outlined in the Regulations for Guiding the Direction of Foreign Investment, which essentially classifies foreign investment into one of four classes: encouraged projects, permitted projects, restricted projects and prohibited projects.

As of 2009, investment in innovative pharma falls under the category of encouraged projects, specifically the production of raw pharmaceuticals which are under patent, those which are granted administrative protection in China, and products which use new technologies. Investment in generic APIs and traditional Chinese medicines is currently restricted, in order to direct investment towards the innovative sector.

In a step to improve investment opportunities for its innovative industries, the Chinese government launched ChiNext on the Shenzhen Stock Exchange—China’s “NASDAQ”—in 2009, paying particular attention to innovative enterprises and supporting venture entities.  ChiNext is expected to play a crucial role in innovation by providing an important exit alternative for many start-ups over the coming years. The independent exchange caters to the high-growth, high-tech sector, and the majority of its 354 listed companies are SMEs with a combined market value of roughly US$ 118 billion.  Currently, 24 companies are listed in the Pharmaceutical Industry on the ChiNext, 9 of which were listed in the last year (see table 1).

Table 1. 24 Pharmaceutical companies listed on the ChiNext (as of Oct. 2012)

1. Ticker	Company Name	Listing Date	Market Cap. (CNY bn.)
   300006	CHONGQING LUMMY	30/10/2009	3.37
   300009	ANHUI ANKE BIOTECHNOLOGY	30/10/2009	2.37
   300016	BEILU PHARMA	30/10/2009	2.05
   300026	CHASE SUN PHARM.	30/10/2009	7.55
   300039	SHANGHAI KAIBAO	08/01/2010	6.50
   300049	INNER MONGOLIA FREE MEDICAL TECH.	20/01/2010	1.59
   300086	HAINAN HONZ	26/05/2010	2.65
   300110	QINGDAO HUAREN PHARM.	25/08/2010	3.09
   300119	TIANJIN RINGPU BIOTECH.	17/09/2010	3.28
   300122	CHONGQING ZHIFEI-BIOLOGICAL PROD.	28/09/2010	12.6
   300138	CHENGUANG BIOTECH	05/11/2010	1.67
   300142	WALVAX BIOTECH	12/11/2010	6.73
   300147	XIANGXUE PHARM.	15/12/2010	3.55
   300158	SHANXI ZHENDONG PHARM	07/01/2011	2.74
   300181	ZHEJIANG JOLLY PHARM	22/02/2011	2.02
   300194	CHONGQING FUAN PHARM	22/03/2011	2.66
   300199	HYBIO PHARM	07/04/2011	3.10
   300204	STAIDSON BIOPHARM	15/04/2011	6.24
   300239	BAOTOU DONGBAO BIOTECH	06/07/2011	1.80
   300254	SHANGXI C&Y PHARMACEUTICAL	19/08/2011	1.16
   300255	HEBEI CHANGSHAN BIOCHEM.	19/08/2011	2.17
   300267	HUNAN ER-KANG PHARM	27/09/2011	4.33
   300289	BEIJING LEADMAN BIOCHEM	16/02/2012	3.52

Note: There is substantial discrepancy between Market Cap values contained in the ChiNext company index found on the official Shenzhen Stock Exchange website, and values found on leading financial data websites. The official ChiNext company index can be found here: http://www.szse.cn/main/en/marketdata/sinformation/index.shtml?CATALOGID=1693&TABKEY=tab4

Intellectual Property Protection

Historically, China has had a skeptical approach towards IP protection, as it was viewed as a hindrance to the country’s imitation- and manufacturing-driven economy. Before 1992, patent protection was virtually non-existent, and between 1992 and 2008 pharmaceutical patents could essentially be violated on a “me-too” basis, where minor structural differences from existing drugs would suffice for marketing approval. In 2008 China became the newest entrant to the intellectual property arena, having finally adopted comprehensive patent protection regulations. Since then, the protection system strengthened significantly, albeit not sufficiently, and, despite the new initiatives, the IP protection arena remains in need of improvement. Current regulations still exclude IP protection of medical treatments, which encompass drug delivery, medical devices and personalized medicine.

Along with remaining regulatory concerns and loopholes, IP implementation is a pressing issue, particularly due to lack of adequate enforcement procedures in place, and due to insufficient numbers of enforcement authorities throughout the country whose pharmaceutical industry is highly geographically fragmented. In 2009, US businesses lost a colossal US$ 48 billion in sales, royalties and licensing fees due to patent infringement by Chinese manufacturers. 

In a recent move to act on this issue, the Supreme People’s Court of China (SPC) has set up two judicial IP protection bodies to act on behalf of the innovative pharmaceutical industry. The government is additionally making an effort to engage with industry representatives and foreign authorities in order to progress necessary amendments in the IP system. A positive increase in numbers of IPR cases in recent years showcases the government’s efforts, and, because the government is able to draw on established legal environments, it is a matter of time before a sufficiently operational IP protection system is in place. 

China’s strengthening IP protection regulations will certainly be an addition to the plethora of factors which will serve to buttress the innovative pharma industry over the next decade.

2012 Pharma Industry Summary Review: Pharmaceutical Industry's Winners and Losers

2012 has been a relatively fruitful year for Pharma. The financial performance of the biotechnology and healthcare indexes showed robust yield compared to the leading indexes, with the Nasdaq Biotechnology index returning ~35% growth YTD (more than 4 times that of the Dow Jones). For some of the publicly traded companies in the sector 2012 was an eventful year, with major achievements that were strongly reflected in their stock performance. The average return on investment this year for the top five companies was more than 350%, fueling up investors’ dreams.

This year we witnessed a bigger appetite for institutional funding when twelve new pharmaceutical companies entered the stock exchanges compared to the ten IPOs in 2011. The IPOs of 2012 were larger than last year, with Puma Biotechnology leading the pack with its mega IPO of $138M.

In addition, this year the momentum for M&A activities continued, as 7 deals above the $1 Billion target were completed and total deal value for the 50 biggest deals topped $27 Billion. Continuing the trend from previous years, M&A activities focused mainly on cancer and CNS therapeutics. Looking at licensing activities, we witnessed a tendency to license compounds in very early development stages, namely discovery and preclinical stages.

But this year wasn’t all about the finance. We also viewed some big achievements in bringing new life saving medications to patients. 2012 will be remembered as one of the years with the largest number of approvals from the FDA, with more than 30 new drugs, most of them targeted at cancer. Some of the drugs approved this year have the potential to become the next blockbuster drugs, addressing therapeutic areas that haven't seen new therapies for more than a decade. We also noticed some monumental failures of companies trying to develop treatments for some of the most serious diseases. We saw the industry giants, Pfizer and J&J, failing in the most expensive Phase III study for Alzheimer's disease, and Bristol-Myers being forced to write-off its very recent investment after the newly acquired compound, BMS-094, showed major safety issues.

For a full summary of the developments in the pharmaceutical industry in 2012 check out Bioassociate's latest free white paper: "2012: The Winners and Losers of the Pharmaceutical Industry"

Time to forget in-house R&D: enter the fully outsourced drug discovery model - Bioassociate for PharmaPhorum

Bioassociate has today published an article on PharmaPhorum about the fact that bulky in-house R&D is quickly becoming a thing of the past. With better outsourcing capabilities, conglomerates are “hollowing out”, whilst new entrants are beginning to operate on fully-outsourced business models.

There are now many companies operating on a model based on outsourcing of 50%+ of their pipeline.  

Click here to check out the original article on PharmaPhorum! 

5-year plans and Biotech: China is becoming an innovator, begins by revamping Pharma and Biotech

China's mammoth manufacturing power needs no introduction. China's innovative sector, however, is perhaps something you have never heard of - for legitimate reasons. Innovation has really not been China's forte, and why should it, after all? Sans world-renowned tech visionaries and science gurus China has already made its way into anything between 80 and 100% of your everyday life - be it through the TV you watch all the way down to the vitamins you take. 

In the Pharma world, China has naturally made a mark as the manufacturing hub for many global drug producers, and generally feeds its own domestic market with the help of massive local generic players (the likes of Harbin Pharma and SinoPharm) which can easily stomp out any or all of the global pharma conglomerates by comparison. 

But one needn't be a leading economist to foresee obvious limitations to a manufacturing and, to some extent, imitation-driven economy. Intrinsically dependent on developments beyond its own borders, such an economy is characteristic of a follower, rather than a leader. 

Whichever way you look at it - China's seemingly exponential growth is only as exponential as is the growth of the economies which produce the novel technologies on which it relies. And China knows it. 

Over the next weeks we will be blogging about China's shifting pharma landscape, everything from the novel government initiatives to what is currently slowly brewing in this domestic industry's primordial bio-broth. 

Follow us for weekly updates on one of Pharma industry's most monumental changes! 

"Made in China” to “Designed in China” part 1: the 12th Set of 5-year Plans

5-year plans are China's social and economic development initiatives and goals for the subsequent 5 years, drafted by the Central Committee and national congresses on behalf of the Communist Party of China (CPC). In 2011 the CPC released the 12^th set of 5-year plans (2011-2015). This latest set of guidelines has been referred to as the most innovation-focused government initiative China has ever faced, and one which explicitly emphasizes innovation in the bio-industry.

In 2006, the National Congress used the word “innovation” for the first time, realizing the country’s massive potential for innovative growth, and in 2011, China’s utmost objective through to 2020 has become to make a transition from a manufacturing-based economy to one guided by innovation-driven growth. The government’s spending on R&D has already been on a steady increase from just 0.6% of GDP in the 90’s to 1.6% in 2011, with plans to reach 2.5% by 2020.

One of the major goals of the latest plans is universal and more accessible healthcare coverage, which will give a necessary market boost to the pharma industry. Domestic developers of pharmaceuticals are encouraged to consolidate, as the industry remains highly fragmented and dominated by a multitude of small-scale players. Foreign investment is being directed towards cutting-edge developments in the country, and domestic players can now take advantage of a 159% increase in the R&D budget  (now amounting to US$ 6.7 billion for biotech alone, from a total of US$ 48 billion), allocated by the government in order to acquire novel IP or establish in-house R&D.

Some of the goals the latest 5-year plans advocate are:

• Emphasis on Intellectual Property rights 

• Government support of joint research programs with foreign companies

• The addition of innovative medicines to the National Essential Drugs List in order for innovators to be compensated for R&D investment
• Applied tax reduction for the pharmaceutical industry
• Development of 30 kinds of innovative drugs and 150 kinds of diagnostic reagents within the next 5YP timeframe
• Initiation of more than 10 clinical trials of new vaccines
• Development of at least 40 biological drugs
• Strengthening of on-site verification of drug registration
• Strict control of development site supervision and drug registration
• Strict control of drug review and approval standards
• Effective control of fraud
• Strong focus on national support of entrepreneurship and innovation
• Active participation in the globalization of drug development and research
• Focus on learning from the scientific supervision concepts of the FDA

Sales of patented drugs have already been steadily on the rise, in line with total biopharmaceutical sales (figure 1),  but as a result of the latest 5-year plan initiatives, domestic Rx pharma sales are expected to exhibit marked growth over the next decade, and to potentially hit sales of US$ 60 billion by 2020.

Perhaps more so than in other industries, the pharmaceutical industry has historically benefited from dedicated government support. The most scientifically innovative countries, the likes of which are Switzerland, Germany, Israel and the US, benefit from higher-than-usual R&D-per-capita budgets, and the Chinese government has not remained oblivious of this fact. The latest set of 5-year plans will inevitably induce visible changes in the innovative pharma industry, and the new decade is likely to see a substantial increase in the volume of foreign investment in China’s developing bio sectors.

Check back next week for Part 2 of "Made in China" to "Designed in China": China's domestic Pharma market situation & stats, plus a briefing on its current industry players who are already innovating!

If you want to skip straight to the point, check out our latest white paper, 

Pharmerging Markets: China – the Next Innovative Pharma Market?